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Monday, March 29, 2010


extension of the egalitarian defense

james livingston's articulation of how societies with concentrated wealth maldistribute their way into vulnerability was one of the more memorable posts of the last few years to my mind (subsequently referenced here here here and perhaps especially here).

an additional effect of wealth concentration was today postulated at naked capitalism, titled 'high income disparity leads to low savings rates', which goes over the notorious research from citi citing the rise of an american plutonomy. from citi:

In a plutonomy, the rich drop their savings rate, consume a larger fraction of their bloated, very large share of the economy. This behavior overshadows the decisions of everybody else. The behavior of the exceptionally rich drives the national numbers – the “appallingly low” overall savings rates, the “over-extended consumer”, and the “unsustainable” current accounts that accompany this phenomenon….

Feeling wealthier, the rich decide to consume a part of their capital gains right away. In other words, they save less from their income, the wellknown
wealth effect. The key point though is that this new lower savings rate is applied
to their newer massive income. Remember they got a much bigger chunk of the
economy, that’s how it became a plutonomy. The consequent decline in absolute savings for them (and the country) is huge when this happens. They just account for too large a part of the national economy; even a small fall in their savings rate overwhelms the decisions of all the rest.

an extension of this postulate is that societies with high wealth disparities should can tend to run high current account deficits, as low savings drives a need for capital importation as well as accommodating high consumption. this, citi feels, is reflected in the data.

ponder for a moment the deeply-held sentiment, explored by richard duncan, that imbalances in the current and capital accounts are what drive global debt bubbles and concomitant busts, and citi's ruminations amount to another avenue of indictment for excessive wealth concentration -- and perhaps further a rational impetus for a measure of redistribution.

alternatively, we might instead simply wait for an L-shaped financial markets crash to disproportionately destroy the wealth and income of the wealthy.

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Wow what a great website! Very informative and well done. At least there are people paying attention to this economic situation.

Do you think October 2010 will be the meltdown? If not when?

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Wednesday, March 24, 2010


booms and depressions since 1775

via big picture, a link to a chart in 'business booms and depressions from 1775', published 1944 and archived by FRASER.


Friday, March 12, 2010


intermediate-term downturn/consolidation prospects

i won't attempt to defend this. it is a weekly closing price screen of the nasdaq 100 components showing the percentage of issues trading either above (demand, green), below (supply, red) or net of (demand-supply, yellow) their volatility envelopes. i've highlighted with green lines positive divergences which indicate institutional accumulation/waning downside momentum; vice versa with red lines. circles indicate points following such divergences where the spread between the demand-supply line and its moving average starts shifting down meaningfully.

the last upturn circle in the series registered in the last week of march 2009. the most recent downturn circle PROVISIONALLY registered in the second week of february 2010. its possible demand moving higher here plays out as it did in 4q2007 with a final bump up in price before weakness materializes. i am definitely drawing that final circle with a measure of anticipation, which could easily be reversed.

but i also do so thinking the probability is good that one will have an opportunity to buy the market at lower prices at some point in the intermediate-term future.

this is not foolproof. it doesn't mean there's a crash coming. even if the signal plays out it might mean a noisy multimonth consolidation of some kind, a la 1q2004-2q2005. but that's what i think i see.


Thursday, March 11, 2010


consumer metrics institute daily growth indicator

via clusterstock, the work of the consumer metrics institute.

Although McGuckin et al indicated that the above problems had been addressed in 2001, it is clear that the statistical methods still used in constructing the LEI differ substantially from the experiences of real people in the real world. The Consumer Metrics Institute exists to provide alternative and more timely approaches to leading indicators, using the demand side of the economy to move our indexes as far 'upstream' as possible.

their march 8 commentary:

The contraction that began on January 15th in the 'demand' side of the economy moderated somewhat over the prior week. As we have mentioned before, the two most recent prior contractions behaved very differently. In 2006 a contraction event was relatively shallow and resulted in the GDP growth rate bottoming at a very meager but positive .1% in the third quarter of 2006. In contrast to that mild event, the 2008 'demand' side contraction reached an annualized 'growth' rate below -6% at the end of August, 2008, with the 'production' side GDP subsequently bottoming at a -6.4% annualized contraction rate during the first quarter of 2009. These two contraction events registered very differently in the equity markets: the 2006 event was largely ignored, the 2008 event was not.

To help investors understand the nature of the current 2010 contraction event, we have constructed a new chart (the "Consumer Metrics Institute's Contraction Watch" chart above here) that shows the first 90 days of the 2006, 2008 and 2010 events superimposed (with the 2010 event still less than 60 days old at this time). Clearly the 2006 and 2008 events look different. We will be able to watch the 2010 event unfold on a day-by-day basis over the next 6 weeks, and the chart should provide us with a much better idea of how it compares with its two predecessors in an almost real-time mode.

By March 6th our 'Weighted Composite Index' completed an extraordinary two week round-trip excursion from essentially neutral readings to nearly 5% year-over-year contraction and back again to neutral. Again the two weakest sectors we monitor were Housing and Retail. The Housing Index (chart on left below) continued to bump along with a very nearly double-digit year-over-year shrinkage in consumer demand, with the Home Loans Sub-Index having shrunk to the lowest level recorded since September 2008. And by March 6th the Retail Index (chart on the right below) had returned to levels indicative of a greater than 6% year-over-year decrease in consumer demand. This number is substantially different from the self reported sales figures from the retail industry, which suffer from 'survivor bias' as a consequence of focusing on 'same store sales in stores open at least a year'. The closing of select stores or entire chains are simply unreported, while the traffic shifted to remaining stores generates a positive spin. Our substantially more negative numbers, however, have been matching sales tax collections, which have no survivor bias. We believe our internet based sample is a fair representation of the entire 'demand' side of the economy, and the sales tax numbers seem to confirm that conclusion.

worth following, i think. of particular pragmatic interest is this.

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It's great to see you posting regularly again Gaius. You were a guiding light during the depths of the global financial crisis from 08 to early 09. I look forward to your commentary to help me guide my way forward from here.

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thanks anon. i'm more active now on twitter, fwiw -- @dafowc -- if you use it. i'll continue to be more sporadic than i'd like, i imagine.

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Tuesday, March 09, 2010


is the consumer relevering?

via econompic, if we are it isn't in the data yet.

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is there a real estate bubble in china?

we might get an answer in coming weeks and months.

China to Nullify Loan Guarantees by Local Governments:

China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.

China Cracks Down On The Shadow Banking System That Is Inflating Its Real Estate Bubble:

China would step up work to monitor non-banking financing, said the China Banking Regulatory Commission (CBRC) Tuesday in a statement on its web-site.

More focus would be put on businesses in connection with trust companies and the real estate sector to prevent banks from using non-banking financing to circumvent policies, said Liu Mingkang, chairman of the CBRC.

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I don't know much about China but I do know that what people say about China they said about Israel... for about 100 years now. Israel has grown economically as a steady pace. Even through wars, economic isolation, climate change, political ups and downs, hyper inflation, THE worst ethnic cleansing ever... it seems to me that American think that China can not make it without them... that they think the Chines people will suddenly get lazy and stop working hard... that they will go back to apartments built in the 1950's... China's economic "wake up" is almost exactly what Israel has done in the 1970S. It is also similar to Japan, South Korea, Spain and probably Russia. I don't think that the Chinese will stop working, educating on a high level or building. Israel seemed to have had building bubbles, but in the end they were just hold-n-wait. Let's wait and see. My blog

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thanks ami.

if it were just about hard work, i think most people in most places would be just fine all the time. china will work itself out in time, and a society with a sixth of the planet's population should by rights be an economic powerhouse dwarfing the united states. it will be in time.

for now, however, china has industrialized using the trick that the US itself tried on europe in the late 19th-early 20th c -- an artificially low currency exchange rate. as then, it has allowed a massive and long-lasted trade/capital imbalance to build up. and that means china has (as the US did then) a massive productive overcapacity which will have to be worked off; this is the flipside of the US having (as europe did then) a massive debt overhang from years of overconsuming from that overcapacity.

the resulting workout will be traumatic, and probably moreso for china than the US (as was the case in the early 20th c, where the US suffered more than did europe).

i can't speak intelligently on israeli economic history, but i'd be interested to know if/when israel ever ran such a sustained economic imbalance, from which side and what in time came of it.

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Monday, March 08, 2010


the everything indicator

via james hamilton.

Of particular interest at the moment is the fact that the HHMSW index, unlike most other indicators, shows a renewed deterioration subsequent to the initial recovery in the first part of 2009, a somewhat surprising result given the current steeply-sloping yield curve, low TED spread, and booming stock market. The surprising contrary inference from the HHMSW index appears to be due to two factors. First, the HHMSW index is based on the deviation of the financial indicators from what one would have predicted given recent economic conditions. Many indicators have not improved as much as one would have expected given the return to GDP growth, and the departure from a typical recovery pattern is viewed by the index as a highly pessimistic development. Second, the HHMSW index makes use not just of the yields themselves but also of the quantities of various assets, and many of these show little improvement so far. For example, issuance of new asset-backed securities remains quite low.

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Fascinating, but it looks like it is coincident, rather than leading.

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thanks david, and i agree. i'm inherently suspicious of backtested data aggregations such as this one.

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